In an experiment published in 2011 psychologist Aarti Ivanic of the University of San Diego, along with her colleagues, recruited 113 African-American and Caucasian shoppers at a mall. They showed half of the African-Americans a list of 10 stereotypical characteristics of their race, including “high athletic ability” and “low performance on an academic test,” and asked them to indicate how much each one applied to them personally.

The participants then received a description of high-end headphones and reported how much they would be willing to pay for them. African-Americans who had been reminded of racial stereotypes offered to pay nearly twice as much for the headphones as either Caucasians or African-Americans who had not been asked about stereotypical traits. The groups did not differ in their interest in actually buying the headphones. Therefore, the researchers concluded that racial typecasting may lead African-Americans to pay more as a way of coping with feelings of lower status. Unfortunately, this finding also hints that African-Americans may be regularly parting with more money than necessary.

In a second study, Ivanic and her colleagues asked 344 participants to imagine that they were planning a vacation, using a fictitious travel Web site. A $200-per-night standard room was the default travel package, but luxury rooms were also available. Participants were asked how much above the standard rate they would pay for the upgrade. African-Americans who had been reminded of their race (in a manner similar to that used in the previous study) offered to pay twice as much as Caucasians for the more costly room. The researchers speculated that African-Americans may attach a higher cash value to luxury because of a greater need to elevate their perceived place on the social ladder.

Widespread feelings of low rank may engender even more unfairness. After all, consumers who are known to pay more are very likely to be charged more, and investigators have found that prices are indeed sometimes higher for African-Americans. For example, in a 2007 study researchers at New York University determined that African-American home buyers in New York City were more likely than Caucasians to be offered mortgages with higher interest rates. The result held even after controlling for median household income.

The next time that you are making a purchase, be aware of your motives. If you harbor feelings of insecurity, you might want to come back later, when you feel a little cockier. You might get a better deal.

The studies clearly reflects that if you feel low status you might be tempted to make decision which might cost you more just to show you don’t belong there instead belong to higher status group. Also if you feel low, don’t make any purchase you might be tempted to make wrong decisions. Just be aware of it and make your decisions not by force but by your need.

To read full article, go to scientificamerican.com

The typical household haul in 1901 is about $750. Families spend a whopping 80% of that on food, clothes, and homes.

In 1950 which is still called has the golden era with full employment, food has gotten much cheaper compared to wages, and its share of the family budget has declined from 43% to 30%.

In the last 50 years, food and apparel’s share of family has fallen from 42% to 17% (and remember, we were near 60% in 1900) as we’ve found cheaper ways to eat and clothe ourselves. Food production got more efficient, and we offshored the making of clothes to other countries with cheaper labor. As a result, apparel’s share of the pie, which hardly changed in the first half of the century, shrank in the second half by two-thirds.

To read more about it, go to TheAtlantic.com

Source courtesy: mymoneyblog.com

The ratio of household debt to income remained relatively stable from 1965 to 1985, fluctuating in a range around 60 percent (Figure 1).

Then in 1986, a fundamental change occurred. Americans became increasingly comfortable with debt. A closer look at key events from 1986 to 2006 reveals important changes that explain why debt increased significantly and drove massive economic growth (Figure 2).

The Economic Recovery Act of 1981 significantly spurred growth in household debt by lowering personal taxes, making more disposable income available to service debt. The strong growth in debt moderated by 1986 but grew steadily for the next decade. In 1986, the first Baby Boomers turned 40 with their highest earning years ahead of them. They justified taking on more debt by anticipating that their incomes would “grow” into it. This growth in debt fueled a surge in economic activity as Boomers purchased bigger homes, minivans and vacations for their growing families.

In 1996, the Tech Bubble took hold and propelled household debt to a new level. Prior to 1996, borrowing was fueled primarily by current income and expected income growth. After 1996, U.S. households became comfortable with assetdriven borrowing. They expected to fund their retirement years through stock price appreciation rather than traditional savings. Growing stock portfolios gave Americans the confidence to save less and redirect their discretionary income to servicing new debt. The resulting growth in debt fueled strong economic growth. When the Tech Bubble ended in 2001, households turned their lust for collateral to the homes in which they lived. The rallying cry of “My house is my retirement plan” could be heard in the hottest real estate markets across the country. Asset-based borrowing fueled further growth in household debt, which rose to a historically stratospheric level of 130 percent of income.

The widespread use of partially amortizing loans added to the debt level taken on by households. At the peak in 2008, U.S. households were straining under the burden of $13.9 trillion dollars in debt, equivalent to 96.6 percent of GDP. When the real estate bubble burst, the age of deleveraging commenced. Not since the Great Depression have U.S. households exhibited such an adverse attitude toward debt.

Facing Reality

To take the right steps toward economic recovery, the problem of household debt must be confronted realistically. Household debt will not increase and drive economic growth until it has first decreased to its long-run average. The reversion process is especially painful because it must overshoot the average before it can return to average. The overshoot is necessary because household debt has been above the average for so long.Rather than delaying foreclosures and continuing to extend and pretend, the more appropriate action is to accelerate debt extinguishment through foreclosure and bankruptcy. This will free households from excessive debt and give them the flexibility to rearrange their finances and return to a responsible level of borrowing and consumption. Some of these foreclosed homes will become rental property for investors

We must accept that a significant amount of household debt currently outstanding will be extinguished through default. While foreclosure is painful to both borrower and lender, it is a necessary process. Our parents and grandparents have survived difficult times like this. So can this generation. The housing market will begin a real recovery cycle when the foreclosure process nears completion. It has to happen sometime. The sooner the better for the economic future of our country.

Take Away
It will hurt, but American households will have to liquidate their assets and reduce debt if they want the economy to recover. This means selling luxury items including vacation homes, boats and RVs, as well as liquidating investments, declaring bankruptcy or suffering through foreclosure.

As they right worded in the Take Away, we all need to reduce our debt or accumulate debt which can be managed by your Income instead of trying to do by Asset based which may create issue if those asset fall in value. In the same article, they talked about Household Debt-to-Asset ratio and Household Mortgage-to-GDP ration in the same context. You can read the full article by going to recenter.tamu.edu.

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What is the Normal Return?

There may not be a right answer. When looking at short-term holding periods, such as one year, it has been normal for the market to have ‘abnormal’ returns. With extreme total returns of -37% in 2008 and about 26.5% in 2009—as measured by the S&P 500 Index—even the most steadfast investors may have struggled with their emotions. The S&P 500 Index is comprised of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

However, 2010′s return of 15.06% was closer to the index’s historical annualized return since 1926 of 9.87%. Is that a more typical year? Indeed, how should investors evaluate their returns?

While the future isn’t predictable, past returns can offer some insights. Consider the chart on this page, which shows the distribution of the S&P 500 Index’s annual total returns since 1926.


A quick glance shows how infrequently the market has declined more than 10% in a year. More evident, though, is that the market returned more than 10% in 48 out of the last 85 years, or more than 56% of the years.

While there is a wide variation of returns, the years in which returns were positive by 10% or more have been much more common than any other outcome.

If the market volatility of the last few years has made investors question their investment strategies, they, likely, are not alone.

How to Avoid making changes during this unstable periods?
Investors may want to take into account this long-term pattern of returns when they are questioning their asset allocation decisions after a year of underperformance. When returns are low or negative, it’s natural to feel that you have to act, but action isn’t always in favor of the investor. Changing an asset allocation decision based solely on the returns of 2008 is just as irrelevant as changing your asset allocation based solely on the returns of 2009. You have to step back and put your portfolio in the context of long-term returns.

Emotional Reactions to Volatility Is Our Worst Enemy
Emotional reactions to market volatility can be investors’ worst enemy. Having a well thought out investment strategy is the first step to conquering the ups and downs of the market.

In conclusion, don’t focus more on the last year’s return, investors in stocks and stock funds may do better making their investment decisions based on their risk tolerance and the time horizon of their financial goals. You can check out my last blog posted about How Risk Tolerance and Time Horizon plays key role in your investment goals.

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